SSH - High expectations for Q4

SSH’s Q3 result missed our expectations and the company now needs a stellar Q4 in order to reach its guidance. SSH is progressing in the right direction, but the pace is slow due to limited growth investment capacity. We maintain our estimates and SELL recommendation with target price of 1.10 euros.

Result miss puts pressure on nailing Q4 to reach guidance

The Q3 result missed our expectations with sales being 3.6m vs our 5.0m estimate. SSH’s prudent cost control led to lower opex than we had anticipated. Despite this, EBIT missed our expectations due to lower sales, with Q3 EBIT being -0.2m vs. 0.7m our estimate. Software fees were 1.3m (2.4m Evli), professional services were 0.1m (0.3m Evli), and recurring revenue was 2.3m (2.3m Evli). In order to reach FY’19 guidance, SSH needs some 7m sales in Q4, which would be an all-time best quarterly result. According to management, sales pipeline for Q4 is strong and they seem confident that the necessary key deals will be closed in Q4.

Secures €2M EU Horizon 2020 funding for PrivX program

SSH successfully attained a €2m SME grant from the EU for development and marketing of PrivX over the next 24 months. Based on our discussion with management, we note that PrivX is still in a development phase and the new funding will be instrumental to accelerating PrivX’s roadmap, with most of the funding going towards R&D. The funding supports our estimates for the coming years, but we do not make any estimate changes at this point. Management sees critical applications even in sensitive fields, such as banks and financial institutions which are important clients to SSH, eventually transitioning to cloud or private cloud environments, but the transition will be over time and gradual. Therefore, PrivX is adapted for on-premise, with full SaaS version being part of the roadmap.

Maintain SELL recommendation with target price of €1.10

Post Q3 result, we have not made any changes to our estimates. Regardless of the profit warning risk, the underlying question in the investment case is still regarding growth. We note that, SSH is making progress, but the speed of the transition is slow due to limited growth investment capacity. On our ’19-20E estimates, SSH is trading at EV/Sales of 3.1x and 2.7x, which is below the sector and could prompt SSH to become an acquisition target of larger players wanting to enter the space or a consolidation play. However, as a standalone business, we’d like to see stronger growth coming through in the numbers to justify higher valuation. Our target price implies an EV/Sales multiple of 2.2x on our ‘20E estimate, broadly in line with Nordic software peers.We maintain our SELL recommendation and target price of 1.10 euros.

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